BP Suit Over Supply Deal Spurs Claim of Oil-Market Rigging

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A firm owned by two Wall Street commodity market veterans has accused oil giant BP PLC of manipulating the crude market on a single day in 2014 to get a better price on a deal it was negotiating with them.

The company, controlled by Kaushik Amin and Neal Shear, pioneers of Wall Street’s foray into commodity markets, claims BP rigged market prices on a day it was using to value a two-year crude-supply agreement, costing the firm $33 million. BP denies the allegations. The pair’s investment partnership, SilverRange Capital Partners LLC, lodged the charges through a subsidiary called NARL Refining Limited Partnership as part of a legal fight over the contract between BP and a refinery it owns in Canada.

The price-rigging allegations, which surfaced in documents filed in New York federal court, haven’t been reported previously.

SilverRange hasn’t yet produced evidence to support its claim that BP rigged the market. BP has previously been sanctioned in the U.S. for natural gas and propane-market manipulation. Pinning price movements in global markets on a single player will be a tough task for them, an analyst said.

“There have been very few manipulation cases proved,” said Rosa M. Abrantes-Metz, a New York University professor and market-manipulation expert who has testified in enforcement cases, including the natural gas case against BP. “The requirements are high, they’re difficult to establish.”

BP Denial

The claims by Amin’s and Shear’s firm “are completely without merit and have been made solely as a tactical move” in the dispute, BP said in a prepared statement. The company said it couldn’t comment further because of confidentiality rules covering the private arbitration proceeding in which the claim was originally raised. The claims were entered into public court records as part of the New York lawsuit.

There are hundreds of traders involved in the roughly $275 billion market for the world’s two main crude contracts, making it too big to manipulate over long periods. But larger dealers can influence it at the margins, causing incremental moves by putting on significant positions when trading is thin.

It’s not the first time BP’s energy-trading unit has been accused of market manipulation. Last month, BP was fined $20 million by U.S. pipeline regulators for gaming the Texas natural gas market in 2008. BP has said it plans to appeal. In 2007, the company agreed to pay $303 million to the U.S. Justice Department and the U.S. Commodity Futures Trading Commission to resolve an investigation into propane market manipulation. The company neither admitted nor denied the allegations.

That same year, a BP trader paid $400,000 to settle CFTC civil charges that he tried to manipulate gasoline futures. He neither admitted nor denied the claims.

CFTC Case

Now, Amin’s and Shear’s firm is raising similar complaints in the arbitration. BP launched the arbitration case against SilverRange last year, claiming the refinery failed to produce the required amount of fuels under the contract. SilverRange sued in New York federal court in January, accusing BP of supplying inferior crude that caused damage to refining equipment.

A judge has already denied SilverRange’s effort to force BP to continue supplying crude to the refinery, as SilverRange sought. The lawsuit has been suspended while the dispute, including the manipulation claim, remains in arbitration. SilverRange could demand that BP produce its trading records, internal communications and other evidence in an effort to back up its claim.

Lead Traders

Shear built the commodity franchise at Morgan Stanley, long considered one of the top-tier firms in the market, while Amin did so at Lehman Bros. Their Wall Street careers were damaged in the financial crisis. Shear, who had risen to a more senior role overseeing trading at Morgan Stanley, was demoted in 2007 following its $3.7 billion loss on mortgage securities, and left the firm soon after. Amin was cited in the Lehman bankruptcy examiner’s report as being a key figure in the use of the so-called Repo 105 accounting maneuver that the examiner said helped the firm conceal its deteriorating finances.

After a handful of other ventures, including a stint at UBS Securities LLC where they first worked together, the two teamed up in 2013 to pursue direct ownership of energy facilities such as refineries and delivery terminals.

Supply Deal

They bought the Come by Chance refinery in Newfoundland and Labrador in 2014 after negotiating a two-year agreement with BP, under which the oil company would sell them crude and then buy the finished fuels. The price tag on the supply deal was tied to the closing prices of the U.S. and global Brent crude benchmarks on Aug. 1, 2014.

As that day approached, the gap between the two benchmarks reached its highest level in a month, which benefited SilverRange, according to court records. But on Aug. 1, a Friday, it lurched in the other direction, contracting 7.5 percent over the course of the trading session, with global Brent prices dropping more sharply than their U.S. counterparts.

According to SilverRange’s court filing, much of the move came in the final half hour of trading before the market closed for the weekend. Traders sometimes use such tactics at day’s end to drive the market in their favor, in a strategy known as “banging the close.”

SilverRange asserts the ripple sliced 50 cents-a-barrel off the value of their deal, or $32.9 million over the life of the contract.

“BP appears to have engaged in manipulation of the crudeoil markets” to force prices down and reduce their cost in the deal, the firm claimed in a court filing.

Weak Demand

At the time, traders and analysts attributed the market’s move to evidence of weakening demand amid the start of a burgeoning supply glut that would ultimately prompt a two-year collapse.

But executives at SilverRange were immediately suspicious and called BP that day to ask if their trading was behind the move, according to the court records. BP assured them, according to one SilverRange filing, that “it was not responsible for the movement and reaffirmed that it would be a good partner in the relationship.”

Evidence of market manipulation has to document intent and show that the price change was directly caused by the tactic. Both private litigation and regulatory enforcement actions have often fallen short. In the CFTC’s most high-profile oil-market-manipulation case in recent years, the agency wound up settling with the defendants for $13 million — much less than the $50 million they allegedly reaped from the scheme.

Class Action

A class-action lawsuit claiming BP, Royal Dutch Shell PLC, trading house Trafigura Beheer BV and others conspired to manipulate global oil benchmarks has dragged on in New York federal court for three years, through three different versions of the lawsuit and with some co-defendants being dismissed from the case. The companies deny wrongdoing.

BP was among companies raided in 2013 and subpoenaed by European Union antitrust officials investigating rigging in the crudeoil markets, but the probe ended without charges being filed.

The case is NARL Refining Ltd. Partnership v. BP Products North America Inc., 16-cv-00404, U.S. District Court, Southern District of New York (Manhattan).